Wednesday, May 22, 2013

Today’s version, however, carries the imprimatur of the New
York Times’ “DealBook” column, and it’s written by a professor to boot.

The gist
of the professor’s case appears right in the first two paragraphs, as follows:

Acquisitions usually come with a nice premium
for the seller. But when Warren E. Buffett is the buyer, there is typically
something of a discount.

The ability to make acquisitions on favorable
terms is a testament to Mr. Buffett’s personality and skills as a deal maker.
It also highlights an almost unsolvable problem for his company,Berkshire Hathaway, and its
shareholders. When its 82-year-old chief executive is gone, who will negotiate
such sweet deals?

Exhibit A in the ensuing story is the recent Heinz deal,
terms of which the professor parses in order to make the point that Buffett got
a “really tasty” deal when considering the expense of the 9% preferred stock
issued to Berkshire relative to the 4.25% yield on debt issued to help fund the
balance of the acquisition:

Mr.
Buffett is getting 55 percent of Heinz plus an interest payment of $700 million
a year. This is an extraordinarily good deal.

Furthermore, the professor points out, the fact that “The
Heinz board decided to deal only with Berkshire” fits the pattern established during the Burlington Northern and Lubrizol deals, where “neither board appeared to negotiate
particularly hard.”

Thus, he concludes, “When it
comes to Mr. Buffett, boards roll over.”

The analysis, however, leaves aside a few important facts.

Fact one is that Berkshire (and its partner in the Heinz deal, 3G)
is paying an all-time high price for Heinz stock since it was founded in 1869.

Fact two is that no strategic buyer expressed any interest at all in outbidding Berkshire and 3G for Heinz.

And the reason nobody else stepped in is that Berkshire and 3G are paying an extremely
high multiple for Heinz—14.3-times EBITDA (a metric Buffett distrusts) and
17.4X pre-tax, pre-interest income, his preferred valuation measure.

In fact, Buffett said at the recent
shareholder meeting, “Charlie and I paid probably a little more than we would
have if we’d bought it ourselves,” without 3G, who will run it.

So the Heinz deal is hardly a steal—and if it
were, surely any number of strategic buyers or Carl Icahn-types would have jumped into the fray to push up the price. (Witness the current bidding war for Sprint, which has an enterprise value of $39 billion, compared to Heinz at $27 billion.)

As for the Burlington and Lubrizol boards
“rolling over” for Buffett during their negotiations, well, again, the facts disagree with the superficial observation: Berkshire paid a record all-time high
price for Lubrizol (specifically, $135 a share for a stock
that had traded at $23.75 less than 24 months prior to the deal announcement).

And in the case of Burlington Northern Santa Fe, a Class 1 railroad with almost no alternative bidder who could even theoretically buy the company, Buffett paid $100 a share for a
stock that had traded above $100 a share for less than five months out of its
160 year history (during the housing bubble, just prior to the financial crisis). Just seven months before Berkshire’s bid the
stock had touched $50.73 a share, and the day prior to the announcement it was
$75.87

Oh, and Berkshire offered either cash or stock
for Burlington’s shares, so whatever the Burlington board was theoretically
leaving on the table by not soliciting somebody else—and who else could have topped Berkshire’s $35 billion bid in those dark days is a topic the
professor does not address—will accrue to those Burlington shareholders who
took Berkshire stock instead of cold, hard cash.

There is one other major factor outside price and availability of other suitors that explains the ability of Buffett to court companies, and it is a big one not discussed in the DealBook article: Berkshire does not mess with the companies it buys.

Unlike most acquirers, who promise their Wall Street investors zillions of dollars in synergies (i.e. layoffs and plant closures) resulting in all manner of earnings accretion, Buffett leaves his companies alone, and that is a tangible benefit which any board of directors ought to consider when deciding what should happen to the assets for which they are a fiduciary.

In the case of Burlington Northern, for example, the ability to invest for growth, without the need to meet Wall Street forecasts, as part of Berkshire Hathaway has allowed the railroad to take advantage of a shale oil boom that has helped boost revenues by 40% and pre-tax earnings by 50% since the day the deal closed.

And that is good for not just the Burlington Northern railroad, and for Berkshire Hathaway, and for Warren Buffett...it is good for the Burlington Northern shareholders who chose to take Berkshire stock, a key point missing from the DealBook analysis.

As for the question asked by DealBook, “When its 82-year-old chief executive is gone, who will negotiate such sweet deals?” the answer is:

The
content contained in this blog represents only the opinions of Mr.
Matthews.Mr. Matthews also acts as an
advisor and clients advised by Mr. Matthews may hold either long or short
positions in securities of various companies discussed in the blog based upon
Mr. Matthews’ recommendations.This
commentary in no way constitutes investment advice, and should never be relied
on in making an investment decision, ever.Also, this blog is not a solicitation of business by Mr. Matthews: all
inquiries will be ignored.And if you
think Mr. Matthews is kidding about that, he is not.The content herein is intended solely for the
entertainment of the reader, and the author.

Monday, May 06, 2013

Well
props to ‘CD 105.9’ is all I can think, driving east on Dodge Street in a
cold rain to the Berkshire Hathaway shareholder meeting early on a dark Saturday morning.

The reason for my good mood? The Omaha “classic rock” station I’ve had my
rental car radio set to the last three days is playing “Back in the USSR,” making
this the first time I’ll have been to a Berkshire meeting with Paul McCartney’s
Beatles-era send-up of communist Russia ringing in my ears.

“Let me hear your balalaikas ringing out/come
and keep your Comrade warm/I’m back in the USSR/You don’t know how lucky you
are, boy/Back in the USSR.”

What better way to get ready for Warren Buffett’s “Woodstock for Capitalists” than that?

Unfortunately, while CD 105.9 manages to mix
more Beatles into its playlist than most “classic rock” formats do (they played
“With a Little Help From My Friends” twice in two days)—something I’ve never
quite understood, since The Beatles’ catalogue is about as “classic” as it gets—the
good vibes never last long because the station also plays an inexplicably heavy
rotation of Bob Seger.

Pondering this oddly heteromorphic play list as the final
A chord on “USSR” fades out, I focus on my driving, because there’s still snow on
the ground here in Omaha—unusual at this time of year, when the fields should
be springing to life—and the roads are slick with rain, which is why they’ve
already opened up the CenturyLink arena to Berkshire shareholders and Buffett groupies instead
of forcing them to wait outside until the normal 7 a.m. doors-open time,
according to a text message from a waiting acquaintance who’s already nabbed a
seat inside and is saving one for me.

Disoriented in Downtown Omaha

But it’s not just the early morning darkness
and wet roads causing me to pay more attention than usual.

Omaha’s had a growth spurt since last year’s
meeting, a fact I’d discovered last night trying to find the
Hilton, which is right next door to the CenturyLink, and both the hotel and the arena used to stand out like the
Empire State Building (in its heyday) above an otherwise barren strip of vacant
lots and highway exit ramps just a few blocks from downtown Omaha.

But
most of those lots have given way to multi-story parking garages, hi-tech warehouses,
bustling industrial buildings and even a baseball stadium (Omaha hosts the college
world series every summer), causing me to lose my bearings more than once last
night and prompting me to pay attention this morning.

(It’s
not just the business district that’s growing: the Old Market area—Omaha’s Soho,
if you will—is changing, too.What used
to be not much more than a square city block of jarring cobblestone streets and
red bricked restaurants, bars and the occasional shop has spread into
neighboring streets, with new restaurants everywhere and even a near-high-rise
condo building going up along its fringe.)

I park on a side street in a metered spot a
few blocks from the CenturyLink—the parking meters aren’t used on
Saturdays (a little trick to save the $8 they now charge for event parking…I
could swear it was $5 last year)—and head to the show while admiring the new
buildings, which seem to be everywhere.

It’s almost Miami-esque, at least in terms of quantity
if not in bling.After all, the Midwest
doesn’t do bling.

Not Exactly ‘Hard Time
Mississippi’

It does do volatile weather, of course, and
the cold rain has eliminated the usual long lines of eager shareholders waiting
for the doors to open, pushing everyone inside to find a seat and then get
coffee before the movie starts.

I find my seat and settle down while absorbing the
scene inside the arena, where 19,000 other people are finding their seats while Stevie
Wonder’s gritty “Living For the City” plays on the sound system—painting
quite a verbal contrast with the very rich, urbane crowd gathering here: “A boy
is born/in hard time Mississippi/surrounded by four walls that ain’t so
pretty/his parents give him love and affection/to keep him strong, moving in
the right direction/Living just enough, just enough for the city…”

Paul Simon’s “The Boy In the Bubble” comes on
next, its terrific beat marred by reference to “the bomb in the baby carriage,” which is a little too close
to the recent events in Boston for comfort, so I head out to try to find Mario
Gabelli, who usually works the floor for investment ideas from locals he has
been grilling for decades, as only Mario can, and immediately bump into Doug
Kass and his son Noah.

Doug is the
short-seller Buffett has chosen to be on the panel of three analysts asking
questions (in conjunction with another panel of three reporters asking
questions, with shareholders making up the rest), and we hug despite him
carrying a bulging briefcase and a clutch of papers. Dougie is prepared, as well he
should be, but that’s no surprise to me. We go way back to the early days of TheStreet.com, where the strictures of a for-profit enterprise eventually led me
to start this not-for-profit blog, and I’ve always admired his willingness to
say what he means and mean what he says without the need for crowd approval—a
trait that will come in handy today.

Daniel in the Lion’s Den

It is, of course, a very good year for Buffett to include a
short-seller on his panel, because so very little has gone wrong for Berkshire lately.

No health scare flare-ups have occurred for
Buffett (at least, publicly), and none of his CEOs have flamed out in the
spectacular fashion of David Sokol two years back, although Buffett did fire the CEO
of Benjamin Moore rather abruptly last summer, prompting speculation it was for
behavior unbecoming a CEO (according to the New York Post it was a flamboyant
boat trip that was the last straw, which Buffett later denied).

Furthermore, business at Berkshire is smoking,
as the earnings release last night showed.Berkshire is, at its heart, an American company—with one big railroad,
several energy utilities and multiple manufacturing companies driving the
numbers, while insurance provides the cash for Buffett to spend as he thinks
rational.And since most of those operations are largely in the US, and since the US is doing far better than Europe at the moment, and since much of our economic improvement is related to the housing
business, where Berkshire has a big footprint, the numbers were really good.

On top of all that, the derivatives bets
Buffett made several years ago (essentially selling insurance against a market
decline) have recovered along with the Europe bourses, reversing bookkeeping
losses that piled up during the take-your-pick-which-southern-European-country’s-meltdown-will-hit-the-front-page-today
period one or two years ago.

Oh, and he just bought Heinz in partnership
with an investor group he admires, which should be a good long-term deal for
Berkshire, and yet he still has $49
billion of cash to invest.

All in all, Dougie could not have picked a tougher
year to accept Buffett’s challenge to play the skeptic in front of 19,000
people in one arena—19,000 people who pretty much worship, or at least admire,
if not adore, Warren Buffett.

But accept it he did, and he seems remarkably
calm but fired up. He proudly introduces
me to his son, I wish him luck and move on, but never manage to find Mario
before the movie begins at 8:30 on the dot.

Breaking Funny

The movie is almost all new, and almost all
the same.

There’s a cartoon and plenty of Berkshire-company
ads, including one laugh-out-loud GEICO commercial; a Jon Stewart love-fest
video clip; and the always-included Salomon Brothers testimony by which Buffett
reinforces the Berkshire culture for every manager in room: “Lose money and I
will be understanding; lose one shred of our reputation and I will be
ruthless.”

There’s a terrific video bit (a very funny
“Breaking Bad” takeoff in which Brian Cranston and his partner-in-crime are
using their desert lab to make peanut brittle, and Buffett wants to buy him out
before it damages See’s Candies) and the whole thing concludes with the usual
celebration of Berkshire’s managers, only the tune is no longer “My Favorite
Things,” it’s “YMCA.”

“We love the managers of B-R-K-A” is the
chorus, with lyrics that name all the usual suspects in Berkshire’s management
pantheon.Soon ballroom lights start
dancing around the arena and then in come cheerleaders (University of Nebraska,
natch), waving pompons and signs with the Berkshire stock ticker letters.

The crowd follows their lead, gets to its feet
and is soon doing the “YMCA” moves….

Poor Doug Kass.

Buffett Steals a Railroad

Buffett starts off the Q&A, as he always
does, reviewing the just-reported earnings, but without the usual management
blather about “beating the analyst consensus” or “executing our key
strategies,” or, most nauseatingly, “driving value for our shareholders.”

Instead he sums things up quite simply: “It
was a benign quarter in insurance, and our other business did quite well.”He notes with modesty that, “fortunately, a
lot of oil has been found very close to our railroad tracks,” so the Burlington
Northern railroad is moving a lot oil—more than half a million barrels a day, which
is staggering considering that amounts to 10% of all the oil produced in the United
States. It’s also pumped up the profits of the BNSF like nobody’s business: car
loadings in the quarter were up the most of the four Class 1 railroads.

In hindsight, Buffett stole the BNSF. He doesn’t say that out loud, of course. But he really did steal it.

This is the math: Berkshire paid 3-times revenue, 8.75-times “EBITDA”
(which Buffett dismisses as a number subject to manipulation—a bit
disconcerting since every company in America waves a highly subjective,
non-GAAP “EBITDA” number in front of Wall Street’s analysts, like a shiny
object in front of a dog) and 12.5-times his preferred number: pre-taxes and
pre-interest income.

But BNSF’s revenue has grown nearly 40% since the deal closed and pre-tax
income has risen 50%.

Thus, on 2012 earnings, Berkshire paid only
7.25-times pre-tax, pre-interest earnings for the Burlington Northern and Sante
Fe Railroad.Union Pacific,
Burlington’s sole competitor in the western states, on the other hand, today trades at 9-times, and that is without any acquisition premium.

So he really did stealit—for $45 billion.

The Fifth Most Valuable Company

Buffett finishes the preliminaries with a
slide showing the five largest market-cap companies, which today includes BRK/A.

“We’re now the fifth most valuable company in
the world,” he says, drawing applause from the crowd, but, again, he doesn’t
play the CEO game where the CEO gripes about the stock price and how Wall
Street analysts misunderstand how great the company is: he simply says, “That
can change over time, but I hope it changes for the better.”

(He also makes an interesting remark about the
US Dollar: “We have so many different operations…I’ve never been able to figure
out [how moves in the dollar affect Berkshire].”And that’s very interesting, because Warren Buffett hasn’t been able to
figure it out, and you can bet he’s tried to.Also, if he can’t figure it out, nobody else will be able to figure it
out.)Better Questions, Better Answers

Now the questions begin, and while the presence of a short-seller on
the panel has generated most of the excitement in the press leading up to the
meeting, it is the presence of another analyst, Jonathan Brandt, that makes it
interesting almost immediately, for Brandt asks sharp questions about
individual businesses ranging from ISCAR to Benjamin Moore to Fruit of the
Loom—questions that have never been asked here before.

So, for the first time since Berkshire became a
conglomerate and the shareholder meetings turned into a kind of therapeutic
self-help mass feel-good gathering, we will really learn something about Berkshire’s
non-insurance operations.

For example, the CEO of Benjamin Moore was
fired last summer not—as the New York Post reported—because of a lavish boat
outing: it was because “the company was investigating moves that would have
violated the promise” Buffett tells us he made to Benjamin Moore’s independent dealers when
he bought the company, i.e. that he would not move distribution into the Lowes and
Home Depots of the world.

That’s interesting, it’s worth knowing, and
it’s the first time outside of the David Sokol affair that we really learned
something about why Buffett made a management change at one of Berkshire’s
businesses.

And while there is much
more along those lines today, the happiest aspect of the meeting, from my point
of view, is that Charlie Munger shows no signs of slowing down.

It Will Still Be Pleasant

Thanks to the new
Q&A system, very few of the old “What should I do with my life?” type
questions are getting asked, which means Munger has a role in answering nearly
all of them.

For example, when asked about the prospect of Buffett’s 45-year
streak of beating the S&P 500 over every five-year period coming to an end this year, Buffett acknowledges “it won’t be a happy day…but it comes in a
period when the market has gone up every year the last five years.”

Munger, however, says simply, “I don’t pay much
attention whether it’s five years or three years…we’re slowing down but it will
still be pleasant.”

Foreign Tissues Will Be
Rejected

Buffett, for his part, is in good form
too.Asked what worries him, Buffett
says, as you’d expect, “Preserving the culture,” while adding, “Any foreign-type
behavior would be rejected like a foreign tissue.”

But it’s Munger who tends to answer the
question while also making the crowd laugh: “My thoughts are very simple—I want
to say to the many Mungers in the audience, ‘don’t sell these shares.’”

When Becky Quick asks about a report that
Berkshire’s cut in the Heinz deal is better than his partners’ share, Buffett denies it
vigorously, going into some detail on the structure. Munger snaps,
“The report was totally wrong.”

Just Because Warren Thought
Something Doesn’t Mean It’s a Law of Nature

Asked about his business partner’s use of
Twitter prior to the shareholder meeting (“Warren is in the house,” was the
first message), Munger says, “It’s very hard for me to know anything about
Twitter when I’m avoiding it like the plague.”

And when Buffett is called to account for
remarks he made some years ago about corporate profits being “extraordinary”
and likely to come down—which has not yet happened—Munger shrugs it off: “Just
because Warren thought something 20 years ago doesn’t mean it’s a law of
nature.”

Asked how Buffett’s successor will deal with
Berkshire’s highly decentralized, far-flung and informal corporate management
structure, Munger dismisses it: “If you run it as decentralized as we
do—almost to the point of abdication—what difference does it make?”

Flimflam, Magic Potions and
Pots & Pans

The nice thing about having a short-seller,
two analysts and three reporters asking the bulk of the questions is
that the questions are well informed, broad-ranging and intelligently worded: after
all, no analyst or reporter wants to look stupid in front of 19,000 people—two
of whom happen to be the smartest investors of their generation.

So interesting topics come up, like Bill
Ackman’s short position in multi-level-marketer Herbalife, which reporter Andrew
Ross Sorkin brings up before asking whether Ackman’s critique of that business model
calls into question Berkshire’s Pampered Chef direct-sales business.

(Funny enough, Ackman is “in the house” here: he’s hard to miss,
being NBA-height in a very non-NBA-height crowd.)

Buffett offers a vigorous defense, saying Pampered Chef
“is a million miles away from…this business of loading up people” with products
they can’t sell, while Munger, as usual, is more succinct: “I think there’s
likely to be more flimflam selling magic potions than pots and pans.”And that, as they say, is that.

I Wish We’d Done It On
PurposeIt’s not all jokes and snappy comebacks, of
course. Asked to “give me the Peter Lynch two-minute monologue” summing up
Berkshire Hathaway’s competitive advantage, Buffett hands the question to Munger.

“Number two, we treat other companies the way
they want to be treated, and that is a competitive advantage” in making
acquisitions.

“Number three, we’ve partnered with good
people and that is a competitive advantage.”Still, Munger can’t resist ending with a joke: “Those were all a very
good idea, and I wish we’d done it on purpose.”

The Fattest Rolodex in the
World

Asked if Burlington’s rail franchise is
threatened by the decline in coal demand (one of the excellent questions by
Jonathan Brandt), and whether the crude oil-by-rail bonanza is likely to end as
pipelines get built, Buffett says, “Well, if there was no coal moving we
wouldn’t have a lot of use for some of the tracks we have…In terms of oil, I think the view a few years
ago was there might be a blip…but I’ve talked to some crude oil producers…and I
think there will be a lot of rail usage for a long time.”(And since Buffett has the fattest Rolodex in
the business world—literally—you can bet he’s talked to oil producers who know
what they’re talking about.)

He also points out that “oil moves faster by
rail than pipeline,” which is quite true: oil flows through pipelines at around
2 miles an hour, on average—we’re not talking fire-hoses here.

Do You Know and Believe In
Jesus Christ?

The significance of those two questions—and
Buffett’s answers—is they would probably not have gotten asked during the
all-shareholder Q&A format a few years ago, when high school students asked
what they should do with their lives (I’m not making that up), teachers asked
how they could draw out their shy students (not making that up, either), and,
once, a man from Norman Oklahoma asked “Do you know and believe in Jesus Christ
and do you have a personal relationship with God?” (Buffett answered that one
straight ahead, without a pause, and you can read his answer in “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” on
Amazon Kindle.)

But there’s another question that would never have
gotten asked, even by the reporters in the crowd—that is asked today by Doug
Kass, who makes good on Buffett’s desire to “spice things up” at the meeting.

Before we get to that, though, an observation about today’s
proceedings is in order.

The CenturyLink Center’s arena, where the
Q&A takes place, is packed—literally
to the rafters.

And while you might think that means today’s
meeting is far better attended than last year’s, which was materially less well
attended than the year before (when the David Sokol Affair prompted a whole lot
of attention on the meeting), the reason has less to do with a bigger crowd
than with less space for everyone to sit down here.

This is something I discover during
lunch, when I go to the exhibition hall to talk to Berkshire managers (my
favorite part of the meeting, Charlie Munger’s answers aside) and realize the
exhibition hall is so full of new Berkshire company displays that it no longer
carves out satellite areas with bleachers and large screens where shareholders
can watch the proceedings outside the claustrophobic arena, which holds 19,000
in hard, uncomfortable folding seats.

There’s a huge new Brooks running shoe display
in the back of the exhibition hall, and the recently acquired Oriental Trading Company is doing
land office business selling Warren and Charlie rubber duckies near the front
entrance (“They’re only $2, what the heck?” seems to be the reaction, given the
line).

So while it may feel more crowded this year,
it isn’t.

But that doesn’t mean the crowd is any less
enthusiastic than years past: after all, Berkshire’s stock is at a new all-time
high—$162,904 per share for the A shares on the close Friday.

And considering that those same “A” shares
were trading at $16 the day Buffett took control on May 10, 1965, well, it’s no
surprise the crowd is feeling upbeat.

How Good Is Warren
Buffett’s Track Record, Really?

But how good is Warren Buffett’s track record,
really?

Well, Berkshire’s stock has appreciated—this
is appreciation only, no dividends, mind you—981,150% since May 10, 1965.

And if you’d put $16 into the S&P 500
instead of into one share of Berkshire on that same day, your share of the
S&P 500 wouldn’t be worth $162,905 today from appreciation (we’re leaving
out the dividends for now.)

In fact, your S&P 500 share wouldn’t be
worth $100,000 today.

It wouldn’t even be worth $10,000 today.

It would be worth about $600.

Throw in dividends and you’re north of $1,000
but south of $2,000 on your $16 investment.The Berkshire shareholder has $162,904.

That’s
how good Warren Buffet’s track record really is.

Hemming and Hawing

Still, Buffett is human, and his response to a
question about what, exactly, IBM’s “competitive moat” may be (from a Los
Angeles-area Microsoft engineer) is not just inadequate, it’s downright
disturbing:

“I don’t understand the moat around IBM as
well as I do around Coca Cola,” Buffett says, adding, “There’s nothing that
precludes both Microsoft that you mentioned and IBM [from doing well over time],” even though the engineer only mentioned Microsoft so Buffett knew
where he was coming from.

IBM, for the record, is a company whose
revenues have stayed dead flat from 2008 to 2012 (at $103 billion), yet has managed to grow operating income by nearly $5 billion, thanks to a flat
expense line and rising gross margins.

If you’re an IBM shareholder, that’s great,
because it’s clear IBM’s management team is “adding value to
shareholders.” But if you’re an IBM customer, that’s annoying, because IBM’s
management is clearly extracting value from its customers through higher prices and better-margined products.

What with all the cloud-based alternatives to
the kind of high-cost, hard-to-get-rid-of software IBM specializes in, it’s no
wonder IBM’s sales have declined the last six months, at an accelerating pace.

But Buffett does not get into the details,
because he doesn’t seem to know them.He
merely says, “I think their odds are good” and then goes into a discourse on
IBM’s balance sheet that, unfortunately, does not give anyone warm and fuzzies about
Berkshire’s massive IBM investment:

“They incidentally have a very large pension
obligation,” Buffett says.“It is a big
annuity company on the side. I would rather they didn’t have that. ...
The liabilities are a lot more certain than the assets over time.”

The whole thing is disturbing, coming as it
does from a guy who can tell you how much it costs GEICO to get a new customer
($250 up front), what the net present value of that customer will be ($1,500),
how many new policies GEICO hopes to write this year (1 million) and what share
that will be of all new auto policies in the US (40%).

But Buffett more than makes up for the IBM fumble when he
is asked another, tougher question.“A
spicy meatball” is what a friend of mine calls these questions—and a very spicy
meatball it is when Doug Kass asks, with the utmost delicacy and respect, about
Buffett anointing his son, Howard, to take his place as Chairman of Berkshire
when Buffett is gone.

Protector of the Culture

Doug begins by saying he means no disrespect
to Buffett by bringing up the topic in front of Buffett’s friends and
family—not to mention Howard Buffett himself.“My own son Noah is here with me,” Doug adds, before asking the best (and most important) question of the day: “How is Howard Buffett the most qualified person to be
chairman of Berkshire?”

Buffett, as he always does, answers it
straight ahead.

“It is not his job to run the business or to allocate
capital or anything else,” Buffett says, stressing that Howard will be a “non-executive Chairman.”But “if a mistake is made in picking the
CEO,” Buffett says, “he is there as protector of the culture…. I know of nobody
that will feel more responsible for that…”

“He has no illusions at all about running the business,” Buffett adds firmly, and
then explains the simple practicality behind the move:

“I have seen many times...when a mediocre CEO,
a likable guy, needs to be changed, but that’s very hard to do” because the CEO was also chairman of the board and
he “controls the agenda” and puts his own friends on the board.

Buffett says, parenthetically, the requirement that “boards
meet once a year without the CEO is a very big improvement because the board is
a social group.”

“Both Charlie and I have seen where a CEO who
is 6 on a scale of 10” stays in place.“It could be very hard to make that change” without a chairman who cares
about the Berkshire culture.Munger pitches in with his usual
objective clarity: “You gotta remember the board
owns a lot of stock. We’re not trying to gum it up for the shareholders.” Furthermore, “It helps to have some objective
person” chairing the board.“I think the
Mungers will be a lot safer with Howard there.” That highlight over, the meeting moves quickly on...but it was a
great question, and well answered.Throughout, the crowd was as silent and attentive as I’ve ever heard it.

It was worth the whole meeting. And not for nothing, every CEO—and every corporate board member,
public or private—should have been here to see Doug ask the question (at any
other meeting Doug’s microphone would have been turned off so fast it would
have made his head spin), and to see both Warren and Charlie answer it,
thoughtfully and at length.

When the topic switches to who will succeed Buffett as CEO (not as Chairman), Andrew Ross Sorkin asks if the CEO successor to Buffett isn’t Ajit Jain, and why Buffett doesn’t just say it is Ajit Jain. But Buffett warns him off such speculation: “You started with the A’s and you won’t have any more luck when you get to the B’s,” Buffett says, shutting down the discussion here, for now. (For readers who want to know who it likely is, and why it will be good for Berkshire, “Warren Buffett’s Successor: Who It Is and Why It Matters” eBooks on Investing, 2013, answers the question even if Buffett will not.) Finally, at 3:30 p.m., after five hours and 63 questions, Buffett ends the meeting to a round of applause from the remaining shareholders, who still fill two-thirds of the arena.

I return to my car and drive back to the hotel
to write this up, “You Can’t Always Get What You Want” playing on my
now-favorite Omaha station. It’s a song
title I think Charlie Munger might have written.

And speaking of Charlie Munger, a few more
Mungerisms before we go…

The Government Increased
the Proof

On the devastating effect of Ben Bernanke’s
ultra-low interest rate policy on retirees: “Well they had to hurt somebody,
and the savers were convenient.”

On one other side effect of the low interest
rate environment: “All over the world the life insurance companies are
suffering the tortures of hell.”

On how young money managers can attract investors
when they have no track record: “I’m glad I’m through with that particular
problem.”

On how the Fed created the housing bubble:
“As things got crazier and crazier, the government could have pulled away the
punch bowl—instead the government increased the proof.”

And why nobody in the government has been
held accountable for the bubble: “You’re complaining about what’s inevitable in
life, and that’s not a good idea.”

Like Using Rat Poison as
Whipping Cream

On why
they should never have let Greece join the EU: “It was like using rat poison as
whipping cream…they lie about their taxes…Europe made terrible mistakes, but they
have politicians like we do.”

Why Italy is not much better than Greece:
“When the mail piles up they just throw some piles away.”

What Buffett
should do before he bargain-hunts in Europe: “Call me if it’s in Greece.”

All Problems Are Trivial
With 2% GDP Growth

On the relationship of US debt to GDP: “I
don’t think there’s some relationship that’s written in the stars.”

On the so-called $16 trillion debt burden:
“Most of the debt is not even included in
that number.”

On how to fix the debt problem: “All our
problems are trivial if GDP grows 2% a year from now on out.”

Trading Agony for Money

On forecasting the economy: “That’s not a field
where I’ve been any good.”

On Buffett’s stock gifts to Bill Gates’
charity: “There’s nothing so insignificant as an extra $2 billion to an old
man.”

On self-confidence: “If you think you know
more than you do you’re asking for a lot of trouble.”

On when he and Buffett would consider splitting Berkshire stock:“I would not hold your breath.”

On whether Berkshire would give money to a
short-seller: “The answer to your question is NO.We don’t like trading agony for money.”

My ‘Too Hard’ Pile

On
whether the US airline industry is finally worth investing in, despite Buffett’s
well-known aversion to it (a question that was asked by Bill Miller, famed for his
15 year “streak” of outperforming the S&P 500 at Legg Mason): “It goes into
my ‘too hard’ pile.”

The More Bankers Want to Be
Less Like Bankers, the Less I Like It

On the US banking industry: “I'm a little less optimistic about the banking
system longer term than you are... I do not see why massive derivative books
should be mixed up with insured banks... The more bankers want to be less like
bankers, the less I like it.”

The biggest threat to US competitiveness: “The
perfectly crazy outcome” of engineering graduates going into derivatives at
banks.

Everlasting Learning

On whether Berkshire will get involved in
helping its businesses manage their responsibilities under Obamacare: “We like
that kind of decision being made near the firing line.”

On Warren Buffett’s pondering out-loud “how
I’d do if I managed money by the math”—meaning computer screens: “You’d do it
poorly.”

On Berkshire’s new model of buying companies
rather than managing stocks: “We’re sort of in a different mode now… If we had
stayed in our old mode we would not be so successful.The game of life is a game of everlasting
learning.At least if you want to win.”

And we’ll conclude with Buffett’s comment on
that last answer from Munger: “And we want to win.”

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